In an editorial in American Banker titled NetBank Failure Kills One Web Bank Model (pw req’d), Christopher Whalen wrote:
[NetBank] was dying — but it wasn’t dying from bad loans. An irrational growth strategy, supported by $1.2 billion in FHLB advances at the end of 2005, as actually killing it. Assets grew [from 2001 to 2005] to peak at just more than 5 billion, when its ROA was 0.07% and ROE was 0.91%. By then the bank’s efficiency ratio was 148%, meaning it was spending $1.48 to get $1 in new revenue.
The FDIC noted that “the failed bank was an Internet bank and did not have any physical branches.” This fact, however, only partly explains the failure of NetBank and, with t, the independent online banking model. Branches and people remain an important part of the business model at US banks. The fact that many online banks have a hard time achieving adequate profitability suggests that this business model may not be viable except as a loss-leader within a larger organization.”
My take: NetBank: 1) Didn’t need branches; 2) Suffered from a poor product strategy; and 3) Wouldn’t have succeeded as a loss-leader subsidiary.
1) NetBank didn’t need branches. Mr. Phalen makes a common mistake: Confusing branches with people. It isn’t the physicalness (physicality?) of a branch that consumers want — it’s the people in them. And increasingly, it doesn’t matter if those people are in a branch, on the phone, or online. Even more importantly, it’s mattering less and less that those people are actually employees of the financial institution. (Dell’s user-supported support network is a great example of this).
The failure of NetBank wasn’t due to lack of branches. It had people who were available on the phone — just not in branches. But the people it had couldn’t overcome the real reason for the failure:
2) NetBank failed because of a poor product strategy. Mr. Whalen is spot on when he says that NetBank suffered from more than just bad loans. Spending $1.48 to get a dollar of revenue can only be sustained for so long. Having branches wouldn’t have fixed that problem however.
ING Direct’s initial success was due to its focus on selling high-yield savings accounts, and not trying to wrest checking accounts away from its customers’ incumbent banks. NetBank’s strategy, on the other hand, was more akin to a traditional bank’s: Trying to become consumers’ primary FI by providing a range of financial products.
It tried to sell a range of financial services, from checking accounts, to savings accounts, to loans. The loans it sold proved to be bad ones. The rates it offered on savings accounts weren’t competitive enough. And not enough people wanted a new checking account.
3) NetBank wouldn’t have succeeded as a loss-leader subsidiary. Could it (or another Net-only firm) have made it as a loss-leader subsidiary of a larger firm? Not a chance (remember Wingspan?). This approach makes no sense. Why create a loss-leader business unit to support a line of business (the retail bank) that may not be making big profits in the first place?
In fact, the opposite (i.e., profitable subsidiary) is happening. Citibank and Emigrant Bank have achieved some success with their online-only units, which aren’t loss-leaders. What makes them successful is their product focus, and the recognition that they’re not cross-selling platforms into other product lines.
And that’s at the heart of why the online-only model wouldn’t work as a loss-leader: It won’t help cross-selling efforts. Hell, most banks’ existing retail LOBs aren’t producing leads and cross-sale opportunities for one another.
Bottom line: NetBank was at a disadvantage from the start. The US adult population, still dominated by boomers and seniors, didn’t want a branchless bank as their primary financial institution.
Does that mean an Internet-only model isn’t a viable one? No way. What NetBank proved is that a poor product strategy will fail regardless of the channels a firm operates in. The jury is still out on whether or not an Internet-only strategy can succeed.
Gen Yers and the generation that follows may turn out to be very different from today’s boomers and seniors. I’m not sure that it’ll even be a traditional FI that they consider to be their primary provider. They may be just as likely to consider a Wesabe or Geezeo their “primary firm” because of the financial advice and guidance they receive from those….sites? firms? networks?
Mr. Whalen may remember NetBank as proof of the failure of the Internet-only bank model. It should be remembered as a pioneer who did a lot of smart things with the online channel, particularly with site design and account alerts.
Ron Shevlin's Marketing Whims 
Hi Ron,
This is fascinating stuff. Clearly you only need to look abroad to see that in itself, online banking can be very successful. The business model obviously needs tailoring to local tastes but for many consumers there’s no issue whether a bank is online, in their local mall or on the end of the phone.
I for one would not make a decision on my financial provider based on their “bricks n mortar” strategy. As long as they are guaranteed, access is secure and the customer service is impeccable, i’m there.
John
Hogwash. The issue with Netbank is the cost of customer acquisition. Branches acquire customers. Neither of you addresses the high cost of advertising, marketing etc needed to replace the customer acquisition function of branches in an Internet model. Comments?
The other issue is product offering. Netbank never came close to industry peer averages in terms of loan yields. That is, it was always playing loss leader vs. competition. How would you address this?
I would be interested to hear some specific examples of profitable stand-alone Internet banking operations anywhere in the world.
Pingback: Why Did NetBank Fail? | Online Savings Blog
Chris – I’m not really sure I understand your point. Are you suggesting that an online only bank will never be profitable or that it’s just a case of “not yet”?
Why are acquisition costs necessarily higher for online banks? Is there an explanation for this? Building up a retail banking presence is surely incredibly expensive and other alternatives are going to be viable for some segments of the market just as private banks are viable for others.
Chris,
I’m confused…..ING bought the NetBank accounts.
ING has no branches. In fact, ING doesn’t want high-maintenance people at all. You call too much, they shut you down.
Am I missing something? Isn’t that an example of a profitable stand-alone internet banking operation?
Oops — The above comment was submitted by
Denise Wymore (working with Tennessee on volunteer marketing).
Hi Ron…..
Denise — Thanks for the comment. And I have a lot of respect for what you’re doing. Personally, I prefer to get paid for my marketing efforts. Pro bono work is very commendable. 🙂
“Branches acquire customers”?
I don’t think I’ve passed a financial institution and thought, “AWESOME! A new bank branch! I’ve been waiting for this opportunity!” Fact is, there is simply too much competition out there to assume that the branch acquires the customer. Rates, products, services, and convenience acquire customers – these can all be addressed in an online-only model.
The bricks and mortar branch would have to advertise just as a website would. Sure, with the physical branch you’d have a presence that would gain valuable “face time” with potential customers…but if you haven’t communicated to those potential customers the value of choosing your financial institution over the six zillion others, you haven’t “acquired” squat. Awareness may lead to acquisition, but it isn’t acquisition. The cost savings of an online model, even after higher advertising expenditures, allows more aggressive pricing – which will always attract a certain type of consumer. The real debate should be is the “rate shopper” segment a profitable market? At the end of the day, these “rate shoppers” are the ones that would detect and realize the most value from online-only models.
Ron,
I do what I can……it’s all about being “cooperative”
😉
d.
Thought I would add a couple points to the discussion:
@Denise- ING is getting into branches with their new cafes, while everyone else is trying to figure out how to create “online only” accounts in the ING way.
@Ron- I agree with your assessment of online accounts potentially being more viable with Gen Y, but that can be a double edged sword. Generally young adults are about twice as likely to open an account online as Baby Boomers, but view physical branches almost as importantly. How they USE a branch however, may vary significantly. They may not use it to deposit a check or make a transaction, but if they have a problem or making a major financial decision, you bet they’re going to want to talk to someone, which fits with your point about it being the people, not just the location.
Interesting discussion.
Bryan Sims-CEO
brass|MEDIA Inc.
I definitely believe that there is a segment of people who are extremely comfortable with online only banking. Is it all GenXers or ALL Millenials? Heck no. But, there are people within each generation (even Boomers) who don’t need a physical bricks and mortar presence to trust a financial institution.
The trick is finding that segment, tailoring your products to meet their needs and then servicing the heck out of them.
A good example of this model, in my opinion is e-surance. They found their niche and they service it well.
The bricks and mortar branch would have to advertise just as a website would. Sure, with the physical branch you’d have a presence that would gain valuable “face time” with potential customers…but if you haven’t communicated to those potential customers the value of choosing your financial institution over the six zillion others, you haven’t “acquired” squat. Awareness may lead to acquisition, but it isn’t acquisition. The cost savings of an online model, even after higher advertising expenditures, allows more aggressive pricing – which will always attract a certain type of consumer. The real debate should be is the “rate shopper” segment a profitable market? At the end of the day, these “rate shoppers” are the ones that would detect and realize the most value from online-only models.
I have been working as a banking business innovator for quite a long time and did a lot of research on the internet-only-bank and even ‘built’ a demo-site based on that model. This made me convinced that a internet-only-bank is a viable model for a lot of people here in the Netherlands. And apparently others seem to agree with me so recently Bizner http://www.bizner.nl/ launched his small business bank based on this model and I do expect it to become succesfull
Pingback: Bank Branches: Big, Expensive Security Blankets « Marketing ROI: Whims from Ron Shevlin
Very interesting discussion, I think that the trend we have been experiencing in the last years with the coming of online banking demonstrate that every day a physical branch is not needed, proof of that is the fact that every day all banks tell their customers to use their electronic channels instead of going to the branch. The core of the business of banking is not have a lot of branch (instead you later want to sell all real states you acquired and used as branches ) but produce money with money, and that my friends, is perfectly doable via electronic channels.
Thanks
Pingback: CU Tomorrow » Blog Archive » A two-pronged cord